There has been significant media attention surrounding the provincial governments proposed changes to the drug system. The following is designed to provide you with some unbiased information on the impact of these changes.

The Transparent Drug System For Patients Act, 2006, more commonly known as Bill 102, provided significant cost savings to the Ontario government on the publicly funded Ontario Drug Benefit (ODB) drug program for residents over age 65. It also created a two tier pricing system between public and private drug plans and resulted in substantial increases to dispensing fees for private payers and impacted all benefit programs.

In July 2009, the Ontario government announced its’ intention to further regulate the prescription drug market in a manner that could have both a positive and a negative effect on plan sponsors, but at the same time have serious repercussions for the financial models used by pharmacies. On April 7, 2010, the Ontario Ministry of Health and Long Term Care announced the following proposed changes to the Ontario drug system effective May 15, 2010.

(Legislation introduction has been delayed pending negotiations with Pharmacy association, revised introduction end of spring 2010 )
The province of Ontario has put forth proposed regulations effective May 15, 2010 which will result in: 

• Lowering the pricing for generic drugs to 25 per cent of the cost of the original brand name drug in a phased in basis by 2012, however these revisions currently as proposed only apply to drugs that are on the ODB list which limits the savings to private plans.

• Eliminating the professional allowances paid to pharmacies by generic drug manufacturers by 2013

• Raising the allowable dispensing fee that pharmacies can charge for their dispensing services under the “ODB” Program for seniors

• Capping the amount of the drug ingredient mark-up paid to pharmacies for ODB prescriptions at 8%

• Investing of $100 million in additional funding by the province to pay pharmacies for providing professional services to patients

Summary of Changes to Employer Sponsored Benefit Plans

1. Generic Drug Pricing – Beginning May 15, 2010

For generic drugs purchased out-of-pocket or through private employer health plans, prices will be reduced to 25 per cent of the cost of the original brand name drug, but this will occur in stages over a two-year time period. The price decreases will be phased in as follows:

• Effective May 15, 2010, reduced to 50 per cent of brand name drug price

• Effective April 1, 2011, reduced to 35 per cent of brand name drug price

• Effective April 1, 2012 reduced to 25 per cent of brand name drug price.

2. Phasing out of professional allowances

Professional allowances are payments generic drug companies make to pharmacy owners for stocking their prescription drug products. These payments currently make up a significant percentage of the cost of generic drugs. There is no cap on professional fees for the private sector.

For generic drugs purchased out-of-pocket or through private employer health plans, professional allowances will be phased out and completely eliminated by 2013 as follows:

• Effective May 15, 2010, capped at 50 per cent

• Effective April 1, 2011, capped at 35 per cent

• Effective April 1, 2012 capped at 25 per cent

• Effective April 1, 2013 reduced to 0 per cent.

3. Increase to dispensing fees under Ontario Drug Benefit Plan

Effective May 15, 2010, the province will increase the dispensing fees paid under the Ontario Drug Benefit plan to $8 per prescription, from the current $7. In rural areas, the Ontario Drug Benefit Plan dispensing fee will be increased to $11. In addition, there will be a further increase to these dispensing fees of 2.5 per cent each year for the next five years.

These increases are designed to partially compensate pharmacies for revenue lost due to the elimination of professional allowances, and to more directly tie compensation to the services that pharmacies provide.

4. Cap on markup for ODB drugs

While the cap on the markup for Ontario Drug Benefit program prescriptions will remain at 8%, this markup is now subject to a dollar limit of $125 per prescription (which will come into play for higher-cost drugs only). This cap applies to drugs paid by the provincial program only. There is no cap imposed on the markup for drugs paid by private health plans or individuals.

5. Professional services

The province has committed an additional $100 million to be used to compensate pharmacies for additional services provided to patients, and to support pharmacies in rural and under-serviced areas. This funding is in addition to the $50 million currently used for the MedsCheck program.

Impact to your benefit program

The changes to the Ontario drug system are significant – and all details have not yet been confirmed by the government.

Based on our initial analysis we expect the reduction in generic drug costs may result in reduced claim costs for those plans that include mandatory generic substitution, however, the reduced revenues from generic drugs and elimination of pharmacy professional allowances will likely see pharmacies dispensing fees increased significantly in reaction to this lost revenue.

In order to gain full advantage of the proposed changes, we recommend a review of your drug plan to ensure that they include the following provisions:

1. If not already doing so, implement a prescription drug card so as that the pharmacy markups may be monitored and limited. Drug cards also offer greater flexibility in plan design and claims reporting.

2. With the government’s aggressive approach to pricing on generic drugs versus brand name, implement a mandatory generic provision on the drug plan, such that the plan pays up to the cost of the generic drug whether or not the patient is dispensed that drug or the physician has indicated “no substitution” on the prescription.

3. Limit the dollar value of the dispensing fee which will be eligible under your drug plan to insulate your plan from expected increases in dispensing fees. The Leslie Group in partnership with Loblaw Companies Limited (includes Zehrs, Fortinos, No Frills, Real Canadian Superstore etc.), is able to offer a preferred dispensing fee arrangement to employees and their eligible dependents who use their Pay Direct drug card.
Currently they will be charged a preferred dispensing fee of $7.99 in Ontario (subject to change), which represents a significant discount from standard dispensing fees in Ontario (typically ranges from $9.99 to $13.45 per prescription). While we expect the preferred dispensing fee to increase as a result of this change to the drug system, the preferred dispensing fee arrangement will continue to be competitive as we expect all pharmacies in Ontario to raise their dispensing fees. Our preferred pharmacy arrangement is provided at over 500 locations across Canada and approximately 300 are located in Ontario providing you and your employee’s reasonable access to lower dispensing cost fees. In addition Loblaws has publicly indicated that they plan to add more pharmacy locations in the 500 stores they currently operate that presently do not offer pharmacy services.

We are closely monitoring this issue and the impact on your plan and your plan members. At a minimum, for your group insurance renewal we also expect these changes will have a positive impact on drug inflation trend factors provided that your plan includes the provisions mentioned above. As part of your renewal process we will review the appropriate plan design options to minimize the impact. We are concerned that these changes will result in a significant reduction of pharmacy locations in Ontario (20% to 50%), which could limit access for residents outside of major centers. We anticipate these changes will hit small independent pharmacies the hardest and this will likely be the ones that are not able to survive going forward. In addition store hours and services that were previously free may now incur a fee (i.e. free delivery, bundle packs). We anticipate that some of the savings will result in increased out of pocket costs to Ontario residents.

For additional information on the Ontario drug reforms, please visit the Ontario government Web site at

The Leslie Group is a full service benefits consulting firm that is, in keeping w ith market conditions and legislative changes, committed to providing you with the best advice needed to manage your group benefits program. We would be pleased to address any questions and can be reached at (416) 510-8966.